The tale starts out by describing Watho, who is an evilly beautiful witch with red hair, white skin and black eyes. She also has the ability (as found out at the end of the tale) to turn herself into a red werewolf. Clearly her hair is symbolic of the flames of hell.
Watho has two ladies "visit" her. One is Aurora, who has rosy skin, blonde hair and blue eyes, whose appearance clearly correlates to the day. The other lady is Vesper, who is blind and lives in an underground chamber. Her hair is black and she has black eyes, and her skin is described as being "silvery." Both of these women have children--Aurora has a boy and Vesper has a girl. Watho tells Aurora that her baby has died and so Aurora flees from the castle. Vesper dies in childbirth so the little girl never knows her mother. Who are the fathers? The boy (Photogen) is the son of a king, but Vesper's husband was dead, so there is a mystery of who the father of her daughter (Nycteris) is.
Watho has a "plan" for both children. She keeps Photogen in the sun all day and never lets him see night, and he is the embodiment of the strong and fearless male. When Watho forbids Photogen to hunt at night, the reader knows that he will not obey, which is a characteristic of the fairy tale. "Photogen listened respectfully, but as he knew neither the taste nor fear nor the temptation of the night, her words were but sounds to him."
Nycteris is kept in the underground chamber, so when she escapes and sees the moon because it gives off so much more light than her little lamp, she believes it to be the day.
The literary elements are that MacDonald places a lot of attention of the characters' thoughts, and he switches between characters throughout his story, it is divided into sections, and when Photogen and Nycteris meet and their stories combine, their story is divided into chapters. It is also much longer than a regular fairy tale.
Both Nycteris and Photogen have to rely on each other to survive because Nycteris fears the brightness and heat of the sun, and Photogen becomes a coward by night. Through their combined efforts, they defeat the werewolf form of Watho. Nycteris smells the beast on the wind because of her heightened senses, and Photogen strikes the wolf in the heart with his arrow.
I believe that what makes this more of a literary tale despite the characteristics of the fairy tale is that there is so much attention to detail, to the names (Photogen-sun, Nycteris-night), to the use of detailed images to describe the emotions of both characters upon their encounters with the night and day.
When Nycteris feels wind for the first time, it is described as such:
As she knelt, something softly flapped her, embraced her, stroked her, fondled her. She rose to her feet but saw nothing, did not know what it was. It was likest a woman's breath. For she knew nothing of the air even, had never breathed the still newborn freshness of the world....Still less did she know of the air alive with motion--of that thrice blessed thing, the wind of a summer night. It was pure spiritual wine, filling her whole being with an intoxication of purest joy. To breathe was a perfect existence. It seemed to her the light itself she drew into her lungs. Possessed by the power of the gorgeous night, she seemed at one and the same moment annihilated and glorified. (Zipes 437)
Of all the traditional fairy tales we have read, not one of them described a person, or nature in such precise detail. The description is beautiful and compelling, and definitely the work of literature, not of folk origins.